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Gold price can push above $2,000 as Fed rate hikes won’t keep up with inflation - SocGen

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(Kitco News) - The gold market still has a path to push above $2,000 an ounce even as the Federal Reserve continues to aggressively raise interest rates throughout the year, according to commodity analysts at the French investment bank Societe Generale.

In the bank's latest commodity outlook, published Wednesday, the analysts raised their gold prices forecast and see the precious metal averaging around $2,100 by the third quarter of 2022. However, that could represent the high-water mark for gold as the bank sees prices dropping back to $1,800 by the second quarter of next year.

The analysts said that the most significant factor dominating the gold market remains real interest rates.

"We are still supportive in the very near term, as we expect monetary and fiscal policy to tighten, but not as quickly as inflation," the analysts said.

The updated outlook comes as the Federal Reserve continues to aggressively raise interest rates in an attempt to cool down inflation. Markets are pricing in a 100% chance that the U.S. central bank will raise interest rates by 75 basis points at today's meeting and in July.

However, SocGen said that inflation will remain hot.

"SG economists have revised up their forecasts from 6.6% to 7.6%. This, combined with Fed hikes expected not to keep up, has created the perfect mix of negative real rates for gold. With the U.S. 10-year nominal rates forecasted to average 3.25% in 3Q22 by SG economists, real rates should remain at deeply negative levels in the short term," the analysts said.

As real interest rates remain in negative territory, SocGen said that geopolitical uncertainty caused by Russia's invasion of Ukraine would continue to support gold's safe-haven appeal. Finally, the French bank also sees rising equity market volatility driving the precious metal price higher throughout the year.

"While both equities and bonds are crashing, gold is grinding 2.3% higher YTD, incentivizing investors to increase their gold holdings to diversify their exposure away from equities/bonds," the analysts said.

Gold could benefit if Fed only raises interest rates by 50 bps; markets see nearly 100% chance of 75 bps move

However, the analysts said that higher gold prices won't be sustainable long term. The bank sees gold prices dropping to $1,600 an ounce by the end of next year as inflation pressures cool and geopolitical tensions start to ease.

Investment demand will continue to drive gold prices. The analysts said they expect to see solid investor interest in gold-backed exchange-traded funds through 2022. The bank sees gold-backed ETFs growing by 350 tonnes this year.

Looking at inflation pressure, SogGen remains hawkish on rising prices as they see the potential for oil prices to increase to $150 a barrel and even as high as $200 a barrel.

The analysts added that these prices will not be sustainable and will ultimately lead to demand destruction.

"Our forecast for oil for 3Q22 is $130/bbl, and based on the forward product cracks, the equivalent product price per barrel is alarmingly close to $200/bbl. If our upside risk of $150/bbl comes to pass, then product prices could easily breach that price level. That would surely cause product demand destruction," the analysts said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.